Exchange-traded funds are one of the most important products created for individual investors in recent years.
Like mutual funds, ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool.
Unlike mutual funds, however, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (“NAV”) of the shares, that is, the value of the ETF’s assets minus its liabilities divided by the number of shares outstanding.
Generally, ETFs combine features of a mutual fund, which can be purchased or redeemed at the end of each trading day at its NAV per share, with the intraday trading feature of a closed-end fund, whose shares trade throughout the trading day at market prices.
ETFs have lower fees compared to mutual funds: according to data from ETF.com, US mutual funds charge an average of 1.42% in annual management fees, while ETFs charge 0.53%, according to an article published by ETF.com.(1)
Some ETFs are passively-managed funds that seek to achieve the same return as a particular market index (often called index funds), while others are actively managed funds that buy or sell investments consistent with a stated investment objective.
Global ETF assets are poised to more than double, to $12 trillion, by the end of 2023 and possibly reaching $25 trillion, by the end of 2027.(3) In the United States, there are currently 143 ETF issuers with a total of 2,350 exchange-traded products (ETPs) in capital markets totaling $4.834 trillion in assets, according to XTF.(2)